Applications of Economic Theory

Running head: APPLICATIONS OF ECONOMIC THEORY
Applications of Economic Theory
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APPLICATIONS OF ECONOMIC THEORY1
Table of Contents
Answer 1............................................................................................................................2
Answer 2............................................................................................................................3
Answer 3............................................................................................................................5
Reference..........................................................................................................................8

APPLICATIONS OF ECONOMIC THEORY2
Answer 1
(a) Australia is dependent on Middle East for supply of petrol. All the passenger cars
with large engines in Australia runs on petrol. Thus, an outbreak of hostilities in the
Middle East would hamper the export market of the Middle East and as a result, there
will less export of oil from the region to Australia. Consequently, the supply of petrol
would reduce by significant amount in the country (Becker 2017). The effect of this
reduction of petrol supply would affect the market adversely. The fall in supply will push
the market supply curve from S to S* as shown in figure 1. Owing to this, the equilibrium
quantity would fall from Q to Q* and subsequently the equilibrium price would rise from
P to P* in the figure. Thus, the petrol market in Australia would contract due to the
outbreak of the said hostilities.
Figure 1: Contraction in
Australian petrol market
Source: (Created by the Author)
The impact of the outbreak will not be limited to the petrol market only, it will
affect the market for petrol run cars too. As the rise in price of petrol would increase the
cost of running petrol cars, the demand for petrol cars would fall (Friedman 2017).
Therefore, the market demand curve of the cars would move towards left from D to D2
as shown in figure 2. Given the situation, the equilibrium price and quantity would adjust
accordingly. Therefore, both the equilibrium price and quantity would fall to P2 and Q2
respectively in the figure. Hence, the price and quantity in the car market would